The legislation that created social security dates back 87 years. Since the program was first paid out in 1937, hundreds of millions of Americans have received benefits. Indeed, the vast majority of those who receive Social Security rely on it for the bulk of their retirement income.
Given the importance of Social Security to the financial health of much of the American public, the news of the program’s serious financial problems is alarming. Due to demographic shifts in the population, Social Security now pays more in benefits than income from payroll taxes and other sources.
Currently, the Social Security Trust Funds are making a difference, but the trillions they have set aside won’t last forever. Here’s what those trust fund trustees believe needs to be done to support Social Security’s finances — and why so many are skeptical that Washington lawmakers have the political will to get the job done.
The coming financial crisis
So far, Social Security has done a good job of collecting enough income to support outgoing benefits. Indeed, the trust funds that support Social Security now have enough money to cover 230% of the program’s projected annual costs for 2022.
That pillow may seem roomy, but it is expected to diminish quickly. Because the large baby boom generation has now largely retired, there are fewer workers supporting a greater number of people receiving Social Security benefits. As a result, trust fund assets are likely to decline from $2.85 trillion at the beginning of 2022 to $1.25 trillion by the end of 2031.
By 2035, the reserves of trust funds will be completely exhausted. Without further contributions from the trust funds to support Social Security’s finances at the time, the sources of income currently available to Social Security would only be sufficient to cover 80% of the planned benefits. Those numbers assume Social Security could tap into disability insurance reserves to pay old-age and survivor benefits; otherwise, the specific trust fund dedicated to retirement benefits a year earlier, in 2034, would effectively run out of money.
Here’s what legislators should do:
The trustees propose solutions to ensure the long-term financial survival of Social Security. However, the solutions are not simple.
One choice is for lawmakers to impose an increase in payroll taxes collected to support Social Security. Currently, employees pay 6.2% of their salary up to $147,000 in Social Security payroll taxes, with employers paying that amount out of pocket. Self-employed persons pay the full amount of 12.4%. To cover the projected financing gap in 2035, payroll taxes should immediately rise to 15.64% and the employee share to 7.82%.
The other choice is to accept benefit discounts. If cuts in distributions were now applied to both current and future beneficiaries, it would take a 20.3% cut to keep the trust funds solvent. If cuts were only applied to future beneficiaries, an even larger cut of 24.1% would be needed.
Any delay would be even more expensive. If lawmakers wait until 2035 to act, would it take an increase in payroll taxes to 16.47% or a 24.9% cut in all benefits to keep the trust funds solvent until the end of the 21st century.
An unbridgeable chasm?
Currently, lawmakers aren’t even close to coming up with a compromise to solve Social Security’s financial problems. Some even want increase social security benefitsseeking funding for measures with broad extensions to the amount of income subject to payroll taxes.
Even most of those who want less Social Security spending are unwilling to propose outright cuts in payouts. Most proposals look at more indirect measures to curb benefits, including further raising the full retirement age to 70. Some lawmakers believe that more fundamental changes, such as the privatization of Social Security to allow for broader investment than Treasury bills, could provide additional financial support.
Legislators may find a way to come to an agreement. It happened in the early 1980s, even when Congress and the White House were divided across party lines.
What seems more likely, though, is that when the time comes, Washington will simply cover any benefit shortfall with money outside of Social Security’s specific funding sources. That will potentially widen the budget deficit, but that could be the most politically viable choice by the mid-1930s.